A year ago, when Israeli software testing company Qualitest announced the appointment of a new CEO to replace one of its founders, the announcement stated that the company had "grown from a garage company into one of the world's largest companies in its field." During the time between its emergence as a small startup working in a garage in the late 1990s and its sale last week for $420 million, ownership of Qualitest changed handsnumerous times. Every one of those owners made a handsome profit on its investment.
Qualitest offers customers from different industries a variety of solutions for software testing and quality assurance. "Sometime in 1997, I had the idea of founding a testing company that would not concentrate on what all the testing companies were focusing on at the time - the Y2K bug," says Ayal Zylberman, who founded Qualitest with Eli Margolin, in a video on the company website produced for its 20th anniversary.
The first deal in Qualitest's shares took place in 2000, when the company had only nine employees. Advanced Logistics Developments (ALD), listed on the Tel Aviv Stock Exchange (TASE), acquired 51% of Qualitest's shares for $360,000 (NIS 1.5 million at the then-rate of exchange), with an option for further investment. Zylberman and Margolin retained the rest of the shares.
Thus began the public chapter of Qualitest's history - as a subsidiary of a stock exchange-listed company. It continued in 2004, when another public company paid NIS 6.5 million for ALD's 51% stake in Qualitest: computer services company Malam Team, controlled by billionaire Shlomo Eisenberg. ALD thereby quadrupled its investment in Qualitest.
Kedma Capital: A turn to overseas and soaring revenue
By the time Malam Team acquired control of it, Qualitest was already a much larger company, with 200 employees, a customer list that included the Israeli air force and Intel, and tens of millions of shekels in revenue. Qualitest made its first overseas foray during the Malam Team period, founding a branch and acquiring a company there.
Qualitest was part of Malam Team for seven years, but in 2011, under an agreement between the Qualitest's founders and Malam Team, the founders decided to utilize a separation mechanism that enabled them to offer to buy Malam Team's Qualitest shares. After failing to reach agreement and an arbitration proceeding, it was agreed that Malam Team would sell its holdings in Qualitest to Zylberman and Margolin for NIS 28.3 million, giving Malam Team a return of more than four times their initial investment.
Before that, the founding duo reached agreement with private equity fund Kedma Capital on a 50% partnership in Qualitest if the founders could acquire Malam Team's shares. Kedma, led by Uri Einan, Gilead Halevy, and Gilad Shavit, paid NIS 22.5 million for the shares, amounting to a value of NIS 45 million for Qualitest. Qualitest's sales turnover at the time was NIS 100 million. Shortly after the Kedma deal, Qualitest acquired a large UK software testing company and established activity in India.
Under the joint ownership of Kedma and the founders, Qualitest became one of the world's largest testing companies, and its revenue soared. Kedma's turn to successfully cash in its investment came in late 2016, when US investment fund Marlin Equity Partners, a fund from California managing over $6.7 billion in assets, acquired Qualitest at a value of NIS 300 million, giving Kedma a return of 6.7 times its investment. This deal also gave one of the founders an opportunity to sell his shares in the company after nearly two decades of activity - Margolin sold his shares to Marlin, making it the controlling shareholder in Qualitest.
Marlin continues expansion and acquisitions
Marlin continued Qualitest's expansion, making four acquisitions in 2016-2018: Experior Group, Test Direct, and divisions acquired from NCC Group and Orasi, with the latter deal being estimated at $35 million.
Qualitest's staff also expanded significantly. The company reported plans to hire 100 veterans of IDF technology units as new employees in 2018. A year later, the company reported a $6 million investment in opening offices in Romania for supporting customers in the gaming industry, technology, and financial services, while hiring 800 new employees in Romania and other countries. As of now, Qualitest has 3,000 employees, half of whom are in Israel (this week, Qualitest announced expansion of its activity in Bangalore, India, and the hiring of 300 employees there to meet the demand).
Another prominent change under Marlin's ownership was in the company's management, with the appointment of Norm Merritt, an American with extensive experience in senior positions in technology companies, as president and CEO in place of Zylberman.
Marlin's time for selling came last week. The buyer is European private equity fund Bridgepoint, which manages over $20 billion in assets. Bridgepoint says that it acquires well-managed companies in attractive sectors in order to help them invest in expansion through acquisitions or a change in operations.
The amount of the deal was not officially announced, but sources close to the deal estimated that it reflected a company value of $420 million for Qualitest, giving Marlin a return of five times its investment. The structure of the deal was not reported, other than the fact that Bridgeport will replace Marlin as controlling shareholder. It is possible that the company itself may receive some money, because the report stated, "The investment will enable Qualitest to increase its market share and accelerate its global acquisitions strategy." No details were given about the holding of Zylberman, who owned 25% of the shares in Qualitest before the deal.
As a private equity fund, Bridgepoint probably does not wish to hold Qualitest forever; it will try to improve it in order to create a successful exit in the future, whether by selling the company to another investment fund or through a public offering. It now remains to be seen what measures Bridgepoint will take for this purpose and in order to maintain the streak of large returns enjoyed by the parties that have held Qualitest's shares so far.
Published by Globes, Israel business news - en.globes.co.il - on July 21, 2019
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